A common response to job loss or a need for a second income is to open a business yourself. The joys of entrepreneurship are many; you set the hours, reap the profits and make the decisions.  Let me suggest three points to consider that will improve your chances of success. First, know where the money will come from to get you from idea stage to making a living.  Most new businesses will not see a profit for three years from opening day. Expect to struggle like the rest of us to open your business, acquire a clientele, pay expenses, give the government their share and have something left over.  So it is critical that your plan include a budgeted sum of money to carry you through the lean times.

     The most common sources of funds include personal savings, retirement plan distributions and loans, many of which come from the bank known as mom and dad.  Personal savings may be the path of least resistance, but it is important that you keep track of what you put in so that you know how much you may pull out in the future without triggering some very complicated tax issues.  A second alternative is to move money directly from a retirement account such as a 401K, to a profit sharing plan established to buy stock in a corporation, to house the new business.  Great care should be taken when selecting this path; this is NOT a do it yourself effort, as a mistake may allow the IRS to consider this a premature distribution and tax you on the money. This course normally requires very specific professional help, which is expensive on initial execution and in yearly maintenance.  Finally, if you will borrow the funds, interview many sources, including local banks, national banks, friends/partners and mom and dad.  Loans, regardless of the source, should be reflected in writing, require you to make payments, including reasonable interest and hopefully offer some flexibility that may minimize initial payments as you start the business.  

     My second suggestion is to give very careful consideration to the product or service you will offer and how you will “create” this business.  People, who pursue something they genuinely enjoy, have a distinct advantage, as do those who enter a business they have previous experience in conducting. If you decide you will enter a new field with limited expertise and will acquire a franchise to help you get started, I urge caution.  Most franchises require a large initial investment. Then you must continue to pay for the right to conduct ongoing business.  I strongly advise a very detailed review of the franchise agreement, a visit to one or more existing franchise locations, that should include a talk with the franchisee and a very frank discussion with the franchise promoter.  Make certain they are committed to your success, have specific plans to help you get started and have some “skin” in the game, should you find that what they promised you differs from your experience.

     Finally I urge you to not be a one person team.  I have not met anyone that can be the CEO, CFO, CIO and Marketing VP. You need an engaged team to help you be a success.  You should include an attorney to create your legal entity and any contracts.  Add a bank professional to help ensure your access to funds and to help process your revenue timely and accurately. And a finally a financial professional, to ensure you are compliant with tax regulations, but more importantly, to create a system to report your results to help you manage your business.

R. Jeffrey Whittaker is a Certified Public Accountant with a practice in Flower Mound.

This article was not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.